Highlighting Diversifying ETFs as Flows Remain at Records

0:00It's time to spotlight ETFs. Joining me now, Matt Bartolini, global head of research strategist, state, street, investment management. I'm so glad you are with us and I want to talk about using ETFs in a way to diversify a portfolio, put alternatives in your portfolio. But the ETF fund flow has been at records and breaking new records. Is that right? Yeah, so far through the first two months of the year, we're on a record setting pace. We actually take those first two months and extrapolate it forward. You're looking at almost two trillion of assets in U.S. listed ETF fund flows for all of 2026. How does that happen? Why is there so much fund flow into ETFs? Well, I think part of it has to do with just secular drivers and the migration away from other vehicles and think of that as mutual funds. But then there's also the more tactical drivers. The market, you know, as in regard to the last couple of days, before that was up quite well. So there's that risk on optimism. We've seen more investment going into those non-US equity exposures. So folks are putting those cash on the sidelines, putting it into work and actually

1:03diversifying their portfolio regionally, not just owning U.S. equities. But one of the bigger things is then the rise of active strategies within ETFs. They've had record flows as well. So it's become a much broader opportunity set for investors to build portfolios. There are secular drivers and there are also sort of more cyclical ones as well. Because there was this renewed risk taking that we saw in folks going into non-US equity exposures more tactically, but also into sectors. Sectors are actually after their best start to a year ever, taking in almost $30 billion a year so far this year. You're talking about some ETFs that folks don't necessarily know. It's really an alternative. Some ways maybe they can diversify their portfolio and have some different types of investment, right? What are you suggesting here today? So when looking at the alternative space, you know, we think about it a way to sort of construct a portfolio that gives you a different reaction function to growth and inflation dynamics. You know, we think about something like gold. Gold has a different reaction to growth dynamics

2:06than say stocks do. Same with broad-based commodities. And we're seeing that that take place right now where you have seen inflation expectations go up as a result of the conflicts in the Middle East. And we've seen commodity, broad-based commodities strategies do well. So it's about trying to piece those different asset classes together and try to get a little bit of a way to diversify differently away from concentrated portfolios or just stocks and bonds. And so something like you have the private public credit, PRIV. What is that and why is that something to have? So for PRIV, PRIV, you know, that's really your core plus bond strategy that is utilizing a unique source of alpha by honing in on some private credit allocations on a more opportunistic basis. Using that as a way to derive the potential for excess returns. We've seen that come through so far this year. I'll perform in this broad-based benchmark and sitting very high up in this peer group in the top quintile. And this is a type of a market environment where

3:08you have seen a tightness of credit spreads. And because of that tightness of credit spreads, you have to sort of look outside different traditional markets to provide some potential for excess return. And we think that investment grade, asset-backed finance, private credit is one of those ways where you can potentially add returns and really diversify your return stream from traditionally just owning high yield corporates or others or more public securities from that perspective. And then the bridge water all whether why is that a good one? So when looking at all W, it really speaks to this type of a market environment where there are more uncertainties than there are certainties. We've had a year-long slug through the market of shifting growth in inflation dynamics, policy evolutions, and now geopolitical risk that has really ignited a reaction in volatility. And we think having that balance and resiliency, you know, all W is a multi-asset capital-efficient portfolio that diversifies across geographies, asset classes, as well as economic environments. Really trying to sort of pick up that resilience

4:11and balance in a market environment like this where there are far more uncertainties and far more volatility. Having that balance and resiliency across asset classes is one of the ways to try to infuse resilience into your portfolio. Yeah, that's what I was really going to ask you. Do you feel that this volatility in the market and, you know, some of the uncertainty is now the best time to be in these kinds of ETFs? Well, I think when I'm thinking about all W from that perspective about the best time to be in the ETF, I just sort of look at the future is going to look awfully different in the recent past. We've had a reworking and a retransformation of our macroeconomic backdrop. We've had shifts in policy dynamics. We have a evolving monetary policy. Already, you've started to see a repricing of fed-rate expectations. As a result of the conflicts in the Middle East, given how it has a reaction function to inflation dynamics, all of those things, if we were to have this conversation about a week ago, it would have been hard to predict that this would happen. So I think about an environment like this where there's massive

5:14amount of uncertainty, where the geopolitical complex is impacting the macro and fiscal side as well, that having a more balanced and something to prepare portfolios for ongoing volatility, whether episodic or structural, I think there's one way to think about why you might need this now, because I do think you're going into this new environment where there's a renaissance for resilience and balance. Matt Bartolini, State Street Investment Management, Matt, it's great to see you. Thank you so much. I'm glad you were with us today.